Lowell Bryan wrote in the McKinsey Quarterly that there is a new metric around: Times have changed and ROIC is no longer important – the new metric is profit per employee. ((Bryan, Lowell, 2007. “The New Metrics of Corporate Performance: Profit per Employee.” McKinsey Quarterly 2007 Number 1. Page 56)) Again, we look at the shift not only in terms of a knowledge economy, but how the focus of work and process shifts to create more value. In effect, the evolution of business shifts concurrently with the evolution of the economy.
Here’s the Article at a Glance:
- Today’s approach to measuring financial performance is geared excessively to the capital-intensive operating styles of 20th-century industrial companies. It doesn’t sufficiently account for factors such as the contributions of talented employees that, more and more, are the basic source of wealth.
- Financial performance—observed through balance sheets, cash flow reports, and income statements—is and always will be the principal metric for evaluating a company and its managers. But greater attention should be paid to the role of intangible capital and the ways of accounting for it.
- Companies can redesign the internal financial performance approach and set goals for the return on intangibles by paying greater attention to profit per employee and the number of employees rather than putting all of the focus on returns on invested capital. ((Bryan, Lowell, 2007. “The New Metrics of Corporate Performance: Profit per Employee.” McKinsey Quarterly 2007 Number 1. Page 56))
Bryan has a point. If we’re locked up in a knowledge economy, why are we still using industrial era production analysis when the real capital is talent? If business can make the shift to evaluating the return on talent rather than capital, would this make the executive teams more interested in what we’re doing? Yesterday I said “HR should be the right hand of the CEO, but to get there, we need to not only understand talent, but tie it together with the organization’s ability to drive production innovation.” Perhaps this is one of those metrics that we can bring to the table that helps us get stronger traction as leaders and contributors in the decision making cycle.
Also, take a look at Toby Lucich’s truly excellent response to this topic here.
3 responses to “HR Versus Finance – Influence, Power, and a Seat at the Table Part 2”
Thanks for the acknowledgement, and a timely find on the McKinsey article. I would note that producing that metric is a simple one that HR should be asking of Finance, today. (A simple execution element.)
Another sign of the times: I noticed a recent Forbes article citing Micron Technology as being 6th for new patents since 2001, and having “more patents per employee than any other firm”.
Measuring intellectual property (IP) per employee feels like this same evaluation. Recognizing the human capital driving IP, and working to effectively mentor, grow, and maximize these resources through new collaborative opportunities seems to be the HR opportunity. (Powerful Insight.)
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